The worst trades in history… Neil Woodford buys small caps

Neil Woodford (born 1960) grew up in Berkshire, and studied for a degree in economics and agricultural economics at the University of Exeter. He then served in various junior roles at City firms, including Reed, TSB and Eagle Star, before studying at London Business School. In 1988 he joined Invesco Perpetual, running various funds for them for more than 25 years. Between 1988 and 2014, Invesco Perpetual High Income, Woodford’s main fund, returned an average of 13.2% a year, significantly higher than the 9.3% that the FTSE All-Share returned over the same period.

What was the trade?

By 2014 Woodford was managing around £33bn across the various funds he ran. But after a falling out with his employers over claims they were interfering too much in his investments, he decided in 2013 to strike out for himself, founding Woodford Investment Management. He set up various funds, including Woodford Equity Income, which attracted large amounts of money from both institutions and private investors who were dazzled by his reputation. The new company started business with £5bn worth of assets.

What happened next?

The Equity Income fund was initially focused on blue-chip stocks, but Woodford also started buying smaller, unlisted companies. Initially, this was not a problem as money continued to flow in – the fund grew to £10bn by June 2017. But when the fund’s luck started to run out and investors pulled out, Woodford was forced to sell off his blue-chips. The unlisted firms then became a bigger part of his portfolio. By June 2019 he was forced to suspend the Equity Income fund, and institutional investors pulled out of his remaining funds.

Lessons for investors

Some of the assets left in the fund remain to be sold, and the FCA regulator is likely to order the fund’s administrator Link to partially compensate some investors, but it’s estimated they may lose at least 40% of their investment over a period where overall share prices went up by a third. The failure of the fund was down to a combination of poor stockpicking and bad luck, but Woodford’s decision to change his style and invest in smaller illiquid companies also played a big role. The scandal is a reminder that superstar managers are not infallible.